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Reporting on the Costs of Start-Up Activities

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Statement of Position 98-5 Reporting on the Costs of Start-Up Activities

April 3, 1998

Reporting on the Costs of Start-Up Activities April 3, 1998 Summary This Statement of Position (SOP)

Summary

This Statement of Position (SOP) provides guidance on the financial reporting of start-up costs and organization costs. It requires costs of start-up activities and organization costs to be expensed as incurred.

The SOP broadly defines start-up activities and provides examples to help entities determine what costs are and are not within the scope of this SOP.

This SOP applies to all nongovernmental entities and, except as stated in the last paragraph, is effective for financial statements for fiscal years beginning after December 15, 1998. Earlier application is encouraged in fiscal years for which annual financial statements previously have not been issued.

Except for certain entities noted in the last paragraph, initial application of this SOP should be reported as the cumulative effect of a change in accounting principle, as described in Accounting Principles Board (APB) Opinion No. 20, Accounting Changes. * When adopting this SOP, entities are not required to report the pro forma effects of retroactive application.

Entities that report substantially all investments at market value or fair value, issue and redeem shares, units, or ownership interests at net asset value, and have sold their shares, units, or ownership interests to independent third parties before the later of June 30, 1998, or the date that the SOP is issued should adopt the SOP prospectively.

* See the Transition section of the Audit and Accounting Guide Construction Contractors, for information on FASB Statement No. 154, Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3, which supersedes APB Opinion No. 20, and is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. [Footnote added, May 2005, to reflect the 2005 conforming changes made to the Audit and Accounting Guide Construction Contractors. Footnote revised, May 2006, to reflect the 2006 conforming changes made to the Audit and Accounting Guide Construction Contractors.]

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Foreword

Statements of Position

The accounting guidance contained in this document has been cleared by the Financial Accounting Standards Board (FASB). The procedure for clearing accounting guidance in documents issued by the Accounting Standards Execu- tive Committee (AcSEC) involves the FASB reviewing and discussing in public board meetings (1) a prospectus for a project to develop a document, (2) a proposed exposure draft that has been approved by at least ten of AcSEC’s fifteen members, and (3) a proposed final document that has been approved by at least ten of AcSEC’s fifteen members. The document is cleared if at least five of the seven FASB members do not object to AcSEC undertaking the project, issuing the proposed exposure draft or, after considering the input received by AcSEC as a result of the issuance of the exposure draft, issuing the final document.

The criteria applied by the FASB in their review of proposed projects and proposed documents include the following.

1. The proposal does not conflict with current or proposed accounting requirements, unless it is a limited circumstance, usually in special- ized industry accounting, and the proposal adequately justifies the departure.

2. The proposal will result in an improvement in practice.

3. The AICPA demonstrates the need for the proposal.

4. The benefits of the proposal are expected to exceed the costs of applying it.

In many situations, prior to clearance, the FASB will propose suggestions, many of which are included in the documents.

Introduction and Background

.01 The Accounting Standards Executive Committee (AcSEC) had on its agenda a series of projects on reporting the costs of activities that are under- taken to create future economic benefits.

.02 The first phase of AcSEC’s series of projects resulted in its issuance of Statement of Position (SOP) 93-7, Reporting on Advertising Costs (ACC sec. 10,590). It was AcSEC’s intention to use SOP 93-7 (ACC sec. 10,590) as a guide in developing guidance for reporting costs of other kinds of activities under- taken to create future economic benefits. This SOP on start-up costs is the next phase.

.03 A review of a number of public-company financial statement disclo- sures indicates that some entities capitalize start-up costs whereas others expense start-up costs as they are incurred. In addition, entities that capitalize start-up costs use diverse amortization periods. These diverse practices exist within and across industries. AcSEC believes this SOP will significantly reduce these diversities in financial reporting.

.04 AcSEC issued an exposure draft of a proposed SOP, Reporting on the Costs of Start-Up Activities, on April 22, 1997. AcSEC received more than eighty comment letters in response to the exposure draft.

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Scope

.05 For purposes of this SOP, start-up activities are defined broadly as those one-time activities related to opening a new facility, introducing a new product or service, conducting business in a new territory, conducting business with a new class of customer 1 or beneficiary, initiating a new process in an existing facility, or commencing some new operation. Start-up activities include activities related to organizing a new entity (commonly referred to as organi- zation costs). This SOP provides guidance on accounting for the costs of start-up activities.

.06 In practice, various terms are used to refer to start-up costs, such as preopening costs, preoperating costs, organization costs and start-up costs. For purposes of this SOP, these costs are referred to as start-up costs.

Note: As noted in subsequent paragraphs, the accounting for certain costs incurred in conjunction with start-up activities are not covered by this SOP. An entity should not infer that costs outside the scope of this SOP should be capitalized. Such costs should not be capitalized unless they qualify for capi- talization under other generally accepted accounting principles.

.07 For purposes of this SOP, activities related to routine, ongoing efforts to refine, enrich, or otherwise improve upon the qualities of an existing product, service, process, 2 or facility are not start-up activities and are not within the scope of this SOP. In addition, activities related to a merger or acquisition and to ongoing customer acquisition 3 are not start-up activities.

.08 Certain costs that may be incurred in conjunction with start-up activities are not subject to the provisions of this SOP. Such costs should be accounted for in accordance with other existing authoritative accounting lit- erature. For example, the following costs are outside the scope of this SOP:

Costs of acquiring or constructing long-lived assets and getting them ready for their intended uses (However, the costs of using long-lived assets that are allocated to start-up activities [for example, deprecia- tion of computers] are within the scope of this SOP.)

Costs of acquiring or producing inventory

Costs of acquiring intangible assets (However, the costs of using intangible assets that are allocated to start-up activities [for example, amortization of a purchased patent] are within the scope of this SOP.)

Costs related to internally developed assets (for example, internal-use computer software costs) (However, the costs of using those assets that are allocated to start-up activities are within the scope of this SOP.)

Costs that are within the scope of Financial Accounting Standards Board (FASB) Statement No. 2, Accounting for Research and Develop-

1 This SOP does not address the financial reporting of costs incurred related to ongoing customer acquisition, such as policy acquisition costs in Financial Accounting Standards Board (FASB) Statement No. 60, Accounting and Reporting by Insurance Enterprises, and loan origination costs in FASB Statement No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases. The SOP addresses the more substantive one-time efforts to establish business with an entirely new class of customers (for example, a manufacturer who does all of its business with retailers attempts to sell merchandise directly to the public).

2 Costs addressed in Emerging Issues Task Force Issue No. 97-13, Accounting for Costs Incurred in Connection with a Consulting Contract or an Internal Project That Combines Business Process Reengineering and Information Technology Transformation, are outside the scope of this SOP.

3 See footnote 1.

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Statements of Position

ment Costs, and FASB Statement No. 71, Accounting for the Effects of Certain Types of Regulation

Costs of fund raising incurred by not-for-profit organizations

Costs of raising capital

Costs of advertising

Costs incurred in connection with existing contracts as stated in paragraph 75d of SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts (ACC sec.

10,330.75d)

.09 Illustrations 1 through 3 in the Appendix [paragraph .44] provide examples of costs that are and are not within the scope of this SOP.

.10 This SOP applies to all nongovernmental entities (including not-for- profit organizations) and it applies to development-stage entities as well as established operating entities.

.11 This SOP amends the following AICPA SOPs and Audit and Account- ing Guides that address start-up costs:

a. SOP 81-1, Accounting for Performance of Construction-Type and Cer- tain Production-Type Contracts, paragraph 75a (ACC sec. 10,330.75a)

b. SOP 88-1, Accounting for Developmental and Preoperating Costs, Pur- chases and Exchanges of Take-off and Landing Slots, and Airframe Modifications, paragraphs 23 and 25 (ACC sec. 10,430.23 and .25)

c. Industry Audit Guide Audits of Airlines, paragraphs 3.115 and 3.117

d. Audit and Accounting Guide Audits of Casinos, paragraph 2.06

e. Audit and Accounting Guide Construction Contractors, paragraph 2.14a

f. Audit and Accounting Guide Audits of Federal Government Contractors, paragraph 3.09

g. Audit and Accounting Guide Audits of Investment Companies, para- graphs 5.14, 8.10, 8.16, 8.17, and appendix K

Conclusions

Accounting for Start-Up Costs

.12 Costs of start-up activities, including organization costs, should be expensed as incurred.

Amendments to Other Guidance

.13 This SOP amends SOP 81-1 (ACC sec. 10,330) by requiring precontract costs that are start-up costs to be expensed as incurred. The following sentence is added to the end of paragraph 75a (ACC sec. 10,330.75a):

Those costs should be expensed as they are incurred if they are within the scope of SOP 98-5, Reporting on the Costs of Start-Up Activities.

.14 This SOP amends SOP 88-1 (ACC sec. 10,430) by requiring preoper- ating costs to be expensed as incurred rather than capitalized. Paragraph 23 (ACC sec. 10,430.23) is amended as follows:

Preoperating costs related to the integration of new types of aircraft should be expensed as incurred.

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In addition, paragraph 25 (ACC sec. 10,430.25) is deleted.

.15 This SOP amends the Industry Audit Guide Audits of Airlines by requiring preoperating costs to be expensed as incurred rather than capitalized. Paragraph 3.115 is amended as follows:

Preoperating costs related to the integration of new types of aircraft should be expensed as incurred.

In addition, paragraph 3.117 is deleted.

.16 This SOP amends the Audit and Accounting Guide Audits of Casinos by requiring preopening costs to be expensed as incurred. Paragraph 2.06 is amended to include the following at the end of the first sentence:

Preopening costs, however, should be charged to expense as incurred.

.17 This SOP amends the Audit and Accounting Guide Construction Contractors by requiring precontract costs that are start-up costs to be ex- pensed as incurred. The following sentence is added to the end of paragraph

2.14a:

Those costs should be expensed as they are incurred if they are within the scope of SOP 98-5, Reporting on the Costs of Start-Up Activities.

.18 Paragraph 3.09 of the Audit and Accounting Guide Audits of Federal Government Contractors refers to paragraph 75 of SOP 81-1 (ACC sec. 10,330.75) as the applicable guidance for accounting for precontract costs. This SOP amends paragraph 3.09 of the Guide as follows:

Precontract costs should be accounted for in conformity with paragraph 75 of SOP 81-1, as amended by SOP 98-5, Reporting on the Costs of Start-Up Activities.

.19 This SOP amends the Audit and Accounting Guide Audits of Invest- ment Companies by requiring organization costs to be expensed as they are incurred. The last two sentences of paragraph 8.10 are deleted and replaced by the following:

Organization costs should be expensed as they are incurred. Entities should adopt the transition provisions of paragraphs 22 and 23 of SOP 98-5, Reporting on the Costs of Start-Up Activities.

In addition, paragraphs 8.16 and 8.17 are deleted, and the following footnote is added after the words deferred organization expense in paragraph 5.14 and in the Statement of Assets and Liabilities in Appendix K (SOP 93-4, Foreign Currency Accounting and Financial Statement Presentation for Investment Companies [ACC sec. 10,570]).

Organization costs should be expensed as they are incurred. Entities should adopt the transition provisions of paragraphs 22 and 23 of SOP 98-5, Reporting on the Costs of Start-Up Activities.

.20 The following sentence is added to the accounting policies footnote for organization costs in the illustrative financial statements in paragraph 9.10 of the Audit and Accounting Guide Guide for Prospective Financial Information:

(Note: SOP 98-5, Reporting on the Costs of Start-Up Activities, requires that

organization costs be expensed as they are incurred.)

Effective Date and Transition

.21 Except for certain entities noted in paragraph .23, this SOP is effective for financial statements for fiscal years beginning after December 15, 1998. Earlier application is encouraged in fiscal years for which annual financial

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statements have not been issued. Restatement of previously issued financial statements is not permitted.

.22 Except for certain entities noted in paragraph .23, initial application of this SOP should be reported as the cumulative effect of a change in accounting principle, as described in Accounting Principles Board (APB) Opin- ion No. 20, Accounting Changes. * When adopting this SOP, entities are not required to report the pro forma effects of retroactive application. Entities are required to disclose the effect of adopting this SOP on income before extraor- dinary items and on net income (and on the related per share amounts) in the period of the change.

.23 Entities that meet all of the following conditions should not report the effect of initial application of this SOP as a cumulative effect of a change in accounting principle: (a) the entities’ specialized accounting practices include accounting for substantially all investments at market value or fair value; (b) the entities’ shares, units, or ownership interests are issued and redeemed at net asset value; and (c) the entities’ shares, units, or ownership interests are sold to independent third parties (for example, parties other than founders, sponsors, and investment advisors) before the later of June 30, 1998, or the date that the SOP is issued. Capitalized costs incurred by these entities prior to initial application of this SOP should not be adjusted to the amounts that would have been expensed as incurred had this SOP been in effect when those costs were incurred. These entities should apply the SOP prospectively for all costs of start-up activities and organization costs incurred at the later of June 30, 1998, or the date that the SOP is issued. For these entities, costs previously deferred that continue to be reported as assets should continue to be amortized over the remaining life of the original amortization period used by the entity, or a shorter period if the expected period of benefit is reduced. The unamortized balance of deferred start-up costs or organization costs and the remaining amortization period should be disclosed.

.24 Except for those entities noted in paragraph .23, initial application of this SOP should be as of the beginning of the fiscal year in which the SOP is first adopted.

of the fiscal year in which the SOP is first adopted. Basis for Conclusions Scope .25

Basis for Conclusions

Scope

.25 AcSEC based its broad definition of start-up activities on the definition used in the 1973 FASB Discussion Memorandum (DM), Accounting for Research and Development Costs. That DM defines start-up costs as “those unusual one-time costs incurred in putting a new plant into operation, opening a new sales outlet, initiating a new process in an existing plant, or otherwise com- mencing some new operation.”

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.26 Some respondents to the exposure draft indicated that the definition of start-up activities is imprecise and leads to confusion about what differen- tiates start-up costs from certain other costs, such as costs incurred to get a long-lived asset ready for its intended use.

.27 AcSEC believes it is not possible to develop a detailed, all-inclusive definition of start-up activities and start-up costs. AcSEC believes the broad definition of start-up activities together with the identification of certain costs that are not start-up costs and the examples provided in the Appendix [para- graph .44] help the reader understand the kinds of activities and costs that may be involved in a start-up situation. Regardless, AcSEC believes that costs previously capitalized as either start-up costs or organization costs should now be expensed as they are incurred.

.28 AcSEC understands that entities may engage in start-up activities to generate revenue or increase efficiencies; AcSEC believes that it is unnecessary to distinguish between the objectives for undertaking start-up activities for purposes of this SOP.

.29 AcSEC recognizes that some entities use the terms start-up, preopen- ing, preoperating, and organization interchangeably and that these terms are used inconsistently in practice. AcSEC believes that it is unnecessary to define the terms individually for purposes of this SOP.

.30 AcSEC also recognizes that some entities differentiate between preopening/preoperating costs and start-up costs as follows:

a. Preopening/preoperating costs are incurred before the commencement of operations or production.

b. Start-up costs are incurred after operations have begun, but before normal productive capacity is reached.

AcSEC believes that this distinction is not made consistently in practice.AcSEC also believes that the guidance in this SOP should be followed regardless of the terms used to describe the activities included in the scope.

.31 AcSEC decided that it was not necessary to develop boundaries for when the start-up period begins and ends. The definition of start-up activities is based on the nature of the activities and not the time period in which they occur. AcSEC believes that costs previously capitalized by entities as start-up costs will be expensed as incurred as start-up costs or some other costs, such as general and administrative.

.32 It is not uncommon for start-up activities to occur simultaneously with other activities, such as the acquisition or development of assets. Paragraph .08 provides examples of costs excluded from the scope of this SOP. AcSEC did not attempt to provide an all-inclusive detailed list of such costs because entities have different accounting policies for the kinds of costs capitalized under existing generally accepted accounting principles (for example, property, plant, and equipment). AcSEC believes entities are best capable of identifying those costs.

.33 This SOP applies to start-up activities of development stage entities as well as established operating entities, as those terms are discussed in FASB Statement No. 7, Accounting and Reporting by Development Stage Enterprises. Paragraph 10 of FASB Statement No. 7 states, “Generally accepted accounting principles that apply to established operating enterprises shall govern the recognition of revenue by a development stage enterprise and shall determine

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whether a cost incurred by a development stage enterprise is to be charged to expense when incurred or is to be capitalized or deferred.” This SOP sets forth the generally accepted accounting principles for costs of start-up activities and thus applies to both kinds of entities.

.34 A majority of respondents to the exposure draft did not address issues related to organization costs. The majority of those who did address these issues believes that organization costs should not be included in the scope of the SOP. One reason proposed to exclude organization costs from the scope of this SOP was to avoid unnecessary bookkeeping resulting from book/tax differences. AcSEC concluded that organization costs are similar to start-up costs and that it could not justify excluding organization costs from the scope of the SOP. Further, if organization costs were excluded from the scope of the SOP, AcSEC believes that it would have needed to define organization costs to help entities distinguish between start-up and organization costs. AcSEC’s definition of organization costs would have been narrower than that contained in the Internal Revenue Code. Therefore, AcSEC concluded that temporary tax dif- ferences would result for some entities whether AcSEC included or excluded organization costs from the scope of the document.

Accounting for Start-Up Costs

.35 About half of the respondents to the exposure draft believe that start-up costs should be reported as assets. AcSEC considered requiring capi- talization and amortization of the costs of start-up activities, including orga- nization costs. AcSEC believes that entities incur costs related to start-up and organization activities with an expectation that there will be future benefits. However, AcSEC believes that this is also often the case with other costs, such as costs related to research and development activities.

.36 Paragraph 86 of FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises, states, “Con-

sumption of economic benefits during a period may be recognized either directly

” Paragraph 148

of FASB Concepts Statement No. 6, Elements of Financial Statements, states, “Other costs are also recognized as expenses in the period in which they are incurred because the period to which they otherwise relate is indeterminable or not worth the effort to determine.”

.37 Some AcSEC members believe that start-up costs may meet the definition of an asset. However, they note that some items that meet the

definition of an asset are not recognized as assets because of uncertainty.

business enter-

prises engage in research and development activities, advertise, develop mar- kets, open new branches or divisions, and the like, and spend significant funds to do so. The uncertainty is not about the intent to increase future economic benefits but about whether and, if so, to what extent they succeeded in doing so. Certain expenditures for research and development, advertising, training, start-up and preoperating activities, development stage enterprises, relocation or rearrangement, and goodwill are examples of the kinds of items for which assessments of future economic benefits may be especially uncertain.”

Paragraph 175 of FASB Concepts Statement No. 6 states, “

or by relating it to revenues recognized during the period:

.38 Paragraph 24 of APB Opinion 17 states, “Costs of developing, main- taining, or restoring intangible assets which are not specifically identifiable,

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have indeterminate lives, or are inherent in a continuing business and related to an enterprise as a whole—such as goodwill—should be deducted from income when incurred.” Start-up costs as defined in this SOP meet all three conditions:

they are not specifically identifiable, have indeterminate lives, and are inherent in a continuing business and related to an enterprise as a whole.

.39 AcSEC decided that the SOP should not amend paragraph 75d of SOP 81-1 (ACC sec. 10,330.75d). AcSEC believes that start-up costs incurred in con nection with existing contracts are contract costs related to a specific source of revenue that should be subject to the accounting prescribed in SOP 81-1 (ACC sec. 10,330). Further, AcSEC decided that start-up costs incurred in connection with existing contracts and in anticipation of follow-on or future contracts for the same goods and services should also be accounted for as contract costs within the existing contract because those costs are expected to be recovered. AcSEC also believes that it is impracticable to bifurcate incremental learning curve or start-up costs that may be incurred under existing contracts in anticipation of follow-on or future contracts.

Disclosure and Transition

.40 AcSEC considered requiring entities to disclose start-up costs incurred in an accounting period and total start-up costs expected to be incurred over the life of a project. AcSEC decided that, for many entities, the costs of record- keeping to identify separately start-up costs incurred in an accounting period likely would outweigh the related benefits of disclosing those costs to users of financial statements. AcSEC also believes that it cannot provide an all-inclusive definition of start-up costs, which would ensure comparability between entities. In addition, AcSEC believes that, if an entity discloses total start-up costs expected to be incurred, it is likely to do so outside the financial statements (for example, in Management’s Discussion and Analysis for a public company).

.41 Some entities currently report certain costs, such as depreciation incurred in conjunction with start-up activities, as start-up costs. Other entities currently report those costs under captions such as “depreciation.” This SOP does not require entities to report those costs as start-up costs.

.42 AcSEC decided that entities that report substantially all investments at market value or fair value, issue and redeem shares, units, or ownership interests at net asset value, and have sold their shares, units, or ownership interests to independent third parties before the later of June 30, 1998, or the date that the SOP is issued should adopt the SOP prospectively. Examples of such entities include open-end mutual funds, regardless of their load features, because open-end mutual funds issue and redeem shares at net asset value (however, closed-end funds would not be examples because those funds may trade at a premium or discount in relation to net asset value). Before operations begin, these entities often incur start-up or organization costs. The expectation is that all shareholders will bear the costs as amortization gradually decreases asset value. Alternatively, the sponsors could pay the start-up or organization costs and get reimbursed through fees charged to the entity that would be borne by the shareholders. AcSEC believes that existing shareholders would experi- ence negative economic consequences if previously capitalized costs were required to be expensed immediately, thereby causing an immediate decrease in net asset value per share. AcSEC believes that it has made a practical decision to ensure that the adoption of the SOP does not cause economic harm to existing shareholders in entities that report substantially all investments at market value or fair value and issue and redeem shares, units, or ownership interests at net asset value.

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Other Authoritative Literature

.43 AcSEC considered the following other authoritative literature in its deliberations of financial reporting of start-up costs. However, the guidance in the following literature is not affected by the provisions of this SOP: (a) FASB Statement No. 19, Financial Accounting and Reporting by Oil and Gas Pro- ducing Companies, and the related AICPA Audit and Accounting Guide Audits of Entities With Oil and Gas Producing Activities; (b) FASB Statement No. 34, Capitalization of Interest Cost; (c) FASB Statement No. 50, Financial Reporting in the Record and Music Industry; (d) FASB Statement No. 51, Financial Reporting by Cable Television Companies; (e) FASB Statement No. 53, Financial Reporting by Producers and Distributors of Motion Picture Films; (f) FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises; (g) FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects; and (h) FASB Statement No. 91, Accounting for Nonre- fundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.

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Appendix

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Illustrations

The Illustrations provide examples that should not be interpreted to be all-in- clusive. Accounting for certain costs incurred in conjunction with start-up activities are not covered by this SOP. An entity should not infer that costs outside the scope of this SOP should be capitalized. Such costs should not be capitalized unless they qualify for capitalization under other generally accepted accounting principles.

Illustration 1

Scenario—A major U.S. beverage company (the Company) begins construction of a new plant in China. This represents the Company’s initial entry into the Chinese market. As part of the overall strategy, the Company plans to introduce into China, on a locally produced basis, the Company’s major U.S. beverage brands. Following are some of the costs that might be incurred in conjunction with start-up activities that are subject to the provisions of this SOP:

Travel costs, employee salary-related costs, and consulting costs re- lated to feasibility studies, accounting, legal, tax, and governmental affairs

Training of local employees related to production, maintenance, com- puter systems, engineering, finance, and operations

Recruiting, organization, and training related to establishing a distri- bution network

Nonrecurring operating losses

Depreciation, if any, of new computer data terminals and other com- munication devices

The following costs incurred in conjunction with start-up activities are outside the scope of this SOP (as noted in paragraphs .07 and .08):

Costs of long-lived asset additions, such as the new plant, production equipment, and packaging lines

Internal-use computer software systems development costs

Costs that are capitalizable as inventory

Deferred financing costs

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Illustration 2

Scenario—A retail chain is constructing and opening two new stores. One will open in a territory in which the entity already has three stores operating. The other will open in a territory new to the entity. (Costs related to both openings are treated the same for purposes of this SOP.) All of the stores provide the same products and services. Following are some of the costs that might be incurred in conjunction with start-up activities that are subject to the provi- sions of this SOP:

Salary-related expenses for new employees

Salary-related expenses for the management store opening team

Training costs and meals for newly hired employees

Hotel charges, meals, and transportation for the opening team

Security, property taxes, insurance, and utilities costs incurred after construction is completed

Depreciation, if any, of new computer data terminals and other com- munication devices

Nonrecurring operating losses

The following costs incurred in conjunction with start-up activities are outside the scope of this SOP (as noted in paragraphs .07 and .08):

Store advertising costs

Coupon giveaways

Costs of uniforms

Costs of furniture and cash registers

Costs to obtain licenses, if any

Security, property taxes, insurance, and utilities costs related to construction activities

Deferred financing costs

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Illustration 3

Scenario—A not-for-profit organization that has provided meals to the home- less is opening a shelter to house the homeless. The organization will rent the facility. This will be the organization’s first shelter and it will conduct a fund-raising campaign to raise money to start up the shelter. The organization will lease space for the shelter and will incur capital expenditures for leasehold improvements and furniture. The organization expects that it will require three months to set up the space for the shelter. The organization will hire a security firm to secure the premises during the three-month period in which the shelter is built. Following are some of the costs that might be incurred in conjunction with start-up activities that are subject to the provisions of this SOP:

Employee salary-related costs related to needs and feasibility studies

Staff recruiting and training

Rent, security, insurance, and utilities

Consultant fees for developing policies and procedures for operating the shelter

Amortization and depreciation, if any, of leasehold improvements and furniture

Costs of social workers

The following costs incurred in conjunction with start-up activities are outside the scope of this SOP (as noted in paragraphs .07 and .08):

Costs of fund-raising

Costs of leasehold improvements and furniture

Architect fees for the leasehold improvements

Advertising costs to publicize the shelter

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Statements of Position

Accounting Standards Executive Committee

(1997–1998)

DAVID B. KAPLAN, Chair

MARK M. BIELSTEIN JAMES L. BROWN JOSEPH H. CAPPALONGA ROBERT O. DALE JOSEPH F. GRAZIANO JAMES F. HARRINGTON JAMES W. LEDWITH

LOUIS W. MATUSIAK JAMES P. MCCOMB CHARLES L. MCDONALD ROGER H. MOLVAR DAVID M. MORRIS BENJAMIN S. NEUHAUSEN MARK V. SEVER

Start-Up Costs Task Force

CHARLES L. MCDONALD, Chair ROBERT U. BOEHMAN JOHN F. KELLY GORDON E. SCHERER

ELIZABETH A. FENDER

Director Accounting Standards

GEORGE C. SCHLEIER TED SHAPIRO LOUIS ULLMAN

AICPA Staff

DANIEL J. NOLL

Technical Manager Accounting Standards

The task force and staff gratefully acknowledge the contributions made to the development of this Statement of Position by Kevin G. Varty.

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